AustralianSuper’s very public move to reject Brookfield’s $20 billion bid for Origin Energy has thrown a spotlight onto the increasing internalisation of investment management by the country’s largest super funds.
The direct management of AustralianSuper’s $60 billion Australian share portfolio, under Shaun Manuell, has seen the fund take a groundbreaking, activist stand on the bid, including being prepared to spend significant sums ahead of the vote to increase its stake in Origin to ensure it could block the bid.
Many of the larger super funds have embarked on some form of internalisation of their investment strategy- to the chagrin of the fund management industry which had been doing very well out of the industry’s growth- but as a new study by research company Morningstar highlights, each fund is taking a different approach.
While strict comparisons between funds are difficult, Morningstar has examined the different internalisation strategies of two major super funds- the biggest ranking AustralianSuper, and the $124 billion UniSuper.
A new paper by Annika Bradley, Morningstar’s director of manager research ratings, Asia-Pacific, notes that while both funds have a high proportion of their assets managed internally, (70 per cent for UniSuper and 58 per cent for AustralianSuper), UniSuper has 74 in-house management professionals, almost all based in Melbourne, while AustralianSuper has an in-house team of 335 professionals located in offices in Melbourne, London, and New York.
“As far as internalisation goes, both funds have a high proportion of assets managed internally, but overall team size differs meaningfully, as does the investment teams’ global footprints,” she writes.
‘Growing pains’
Comparing the pair, Bradley argues that one of the big differences is that AustralianSuper has a much higher percentage of its funds in illiquid assets – some 27 per cent as of the end of last year compared to only 12 per cent by UniSuper.
“Typically, the management of private assets is more resource-intensive which partially explains the difference in the number of internal investment professionals,” she says.
She notes that AustralianSuper has had to evolve continuously as a result of the phenomenal growth in its assets. The fund has grown over the past ten years from $65 billion in 2013 to $300 billion today – a multiple of 4.6 times over the decade.
It now takes in a net $20 billion a year which it has to invest.
“Its suite of capabilities has expanded considerably with private assets, illiquid credit, and global bonds priorities, alongside beefed up operational and risk groups,” Bradley says.
But she warns that “this isn’t costless and breakneck hiring needs to be balanced against becoming too bureaucratic.”
UniSuper has had a strong but slightly slower growth trajectory, with its assets increasing from some $40 billion in 2013 to its current level of around $124 billion (a multiple of just over three times over the decade).
It has also taken a more incremental approach to hiring investment professionals.
It’s internalisation program started in 2009, with the fund trading its first share in 2010.
Bradley predicts that “further internalisation [by UniSuper] is likely to be incremental rather than revolutionary.”
She notes that UniSuper has also taken more of a partnership approach to managing private assets.
“Its $4 billion of directly owned property has been managed by a unique mandate arrangement for over 20 years,” she says.
“The partnership leverages the expertise of the external property manager, while allowing the internal team to maintain full control over all aspects of the portfolio.”
Millions saved
Funds such as AustralianSuper can point to the millions they are saving from bringing investment management in-house. The fund set up its internal equities program a few years later than UniSuper, taking the management of $1 billion of shares in-house in 2013.
It estimates it has saved as much as $1 billion in fees over the past decade by bringing investment management in-house.
But having more in-house investment staff, Bradley notes, also creates its own risks with hiring and retaining key staff in the competitive funds management sector.
As she puts it, “the number of internal team members is one thing. Attracting quality people and retaining it is another.”
She notes that both funds have had their share of high-profile departures in recent years. Two of UniSuper’s top stock pickers, Simon Hudson, and Mark Himpoo, left in 2021 and 22.
It is a sign of the times that they were both recruited to join the growing Jarden Australia investment banking team, but this year have gone out on their own with former Jarden Australia director, Dane Fitzgibbon, to launch a new funds management business, Play Fair Asset Management.
AustralianSuper saw the departure of property specialists John Longo and Neil Harvey in late 2019 while Bevan Towning left its property team in April this year.
The fund’s head of equities, Innes McKeand, left early in 2021 while Justin Pascoe left the same role early this year.
“Attracting and retaining quality people is a challenge,” Bradley notes.
“Growing pains should be expected given the rapid rate of growth these funds have experienced.”
No one-size-fits-all approach
It notes that AustralianSuper has the additional challenge of managing a team across several geographical locations.
At the top of the investment teams of each fund are the key chief investment officers – AustralianSuper’s Mark Delaney, who has been with the fund since it was formed from the merger of ARF and STA in 2006, and UniSuper’s John Pearce who joined the fund in 2009 after two years as head of global asset management with Chinese insurance giant, Ping An, and six years with Colonial First State, including as CEO.
Both are well respected in the industry and will be hard acts to follow when they depart with both, as Bradley points out, having to grow in-house investment teams while retaining their own industry super style culture.
“How long these two leaders stick around and how the organisations look to handle their eventual succession are definitely watch points,” she says.
While the internalisation of investment management will save money on fees which would be otherwise paid to external fund managers, the real question is whether it generates higher net investment return for members.
Again, comparisons can be difficult (who could say with precision what the funds would have earned had they not internalised their investment management?), but Bradley concludes that “the internalisation programs at both funds have delivered solid outcomes for their members.”
Over a five-year period, the balanced options of the two funds have delivered similar returns: 6.1 per cent a year by UniSuper and 6.2 per cent by AustralianSuper.
AustralianSuper’s balanced option has done better over the most recent three-year period (7.1 per cent a year as opposed to UniSuper’s 6.1 per cent), but over the past year the UniSuper balanced option showed a return of 10.1 per cent compared to AustralianSuper’s 8.5 per cent.
Bradley notes that AustralianSuper’s investment management fees are higher than UniSuper’s, with AustralianSuper’s being 0.5 per cent (made up of 0.40 per cent investment management fees and 0.10 per cent in performance fees) with UniSuper’s coming in at a lower 0.41 per cent (with investment management fees of 0.38 per cent and performance fees of 0.03 per cent).
As she notes, managing unlisted and private assets are typically more expensive and may account for some of the difference in fees between the two funds.
She concludes that both funds have high-quality investment staff and investment processes and there is no “one size fits all” model for successfully managing assets in-house.
“Managing large pools of capital can be approached in different ways,” she said, concluding diplomatically that no one way is more “right” or effective than the other.
“What is clear is that these funds are now large, complex investment businesses and it’s worth taking a look under the hood before making an investment decision,” she says.
Bradley’s comparison paper follows Morningstar’s decision this year to add UniSuper to its “multi asset options coverage”- another sign of the times of the growing importance of the big industry funds in the financial sector.
While superannuation funds are not subject to the intense scrutiny of their financial and internal operations as listed companies, it is good to see research houses such as Morningstar- as Bradley puts it – taking a closer look under the bonnet of the big funds.
With one of the highest levels of insourcing of investment management as percentage of total funds of any of the big super funds, UniSuper is taking a careful approach to the future of the process.
“We believe that our in-house capability provides us with a key point of differentiation and contributes to our competitive edge, and our approach has been grounded in taking logical and incremental steps’ chief investment officer, John Pearce, tells Investment Magazine.
“We will continue to run a hybrid model, as we are also aware of our limitations.”
